USD/CAD has reversed directions on Wednesday and posted slight losses. Currently, the pair is trading at 1.3445, down 0.17% on the day. On the release front, Canada releases inflation indicators, led by CPI. The indicator is expected to decline by 0.4%. There are no major releases out of the U.S., but traders will be busy keeping an eye on the Federal Reserve, which is expected to raise rates to a range between 2.25 and 2.50 percent.
The markets are expecting the Federal Reserve is expected to raise interest rates on Wednesday, which would mark the fourth rate hike in 2018. The odds of a rate hike have dropped sharply – only last week, the odds of a hike stood at 77%, but are currently at 66%.
A key factor in the drop is the latest equity sell-off. On Monday, the S&P 500 Index sank to its lowest level since October 2017. Rate hikes are unusual when stock markets are in a downward spiral, but the Fed is likely to press the rate trigger. At the same time, the Fed may try to soothe the nervous markets with a cautious message about further tightening next year, which has boosted the euro ahead of the meeting. Just a few months ago, there was heady talk of three or four rates in 2019, but analysts are now predicting just one hike, as the U.S economy is showing signs of slowing down.
Weaker oil prices have hurt the Canadian economy, dragging down growth and inflation. CPI, the primary gauge of consumer inflation, has struggled, with two declines in the past three months. Will inflation fall again in November? If so, the Canadian dollar could continue to slide. The currency has declined for four straight weeks, dropping 1.8% in that time. In addition to soft oil prices, the global trade war has taken a bite out of Canada’s export sector. The Bank of Canada is expected to respond by scaling back rate hikes. The bank has raised rates three times this year, but stayed on the sidelines at the December meeting. With the Federal Reserve expected to raise rates just once or twice in 2019, there will be less pressure on the BoC to raise rates in 2019.
